CONSEQUENCES OF PASSING THE RISK OF LOSS

International sales governed by the CISG are likely to involve transport of goods over substantial geographical distances, and frequently involve transportation through multiple carriers and types of carriage, or multimodal transport. Shipping goods from a landlocked seller across water to a distant buyer is likely to comprise on-loading and off-loading from trucks, ships, and railways, each operated by a different entity. The consequences include both increased likelihood of damage or loss for the goods and increased difficulties in identifying the point at which any damage occurred. As a result, the default rules allocating the financial responsibility for loss or damage to the goods take on additional importance in these transactions. They inform buyers and sellers of the effects of damage or loss on their underlying obligations to pay or to deliver conforming goods and determine which of them is entitled to pursue remedies against the carriers involved in the transaction.

Legal systems differ in their default rules allocating risk of loss. They tend to allocate risk in three different ways. Some national law based on Roman law passes risk from the seller to the buyer at the conclusion of the contract. A second group of legal systems passes risk with respect to the goods sold when title (property) to them passes. The third group of national laws passes risk of loss on delivery of the goods to the buyer. The CISG's risk of loss rules are closest to the third group. They do not and cannot pass risk based on passage of title, because the CISG does not determine title in the goods, and with a single exception do not pass risk to the buyer at the conclusion of the contract. Instead, under the CISG's basic risk of loss rule risk generally passes when the buyer takes over the goods or is in a position to do so. The details of the CISG's risks of loss rules are described and evaluated in the sections that follow.

The CISG's treatment of risk of loss begins with a statement of the consequences of the passage of that risk. The primary consequence results from a negative implication.

INTRODUCTION: LEGAL CONSEQUENCES OF CHANGED CIRCUMSTANCES

Virtually all legal systems provide some basis for allowing parties to deviate from contractual performance with impunity when circumstances substantially change between the time the contract was concluded and the time that it is to be performed. The relevant changes usually implicate a significant unanticipated increase in one party's costs of performance or the occurrence of some unanticipated physical or regulatory obstacle that destroys the subject matter of the contract or the rationale for performing it. Legal doctrine recognizes that commercial parties enter into contracts that each believes will be personally profitable to perform, and that those beliefs are based on assumptions made at the time of the conclusion of the contract about the conditions that will exist at the time performance is due. Sellers, for instance, assume that they can procure the goods necessary for performance at a price lower than the contract price, while buyers assume that they can profitably use the goods for which they have contracted. Both parties assume that they will be physically able to perform the contract. Less certain, at least where the contract is silent, is how parties intend to allocate the risk that those assumptions prove incorrect. Different legal systems apply very different default rules that allocate that risk by defining the range of conditions under which nonperformance does not constitute a breach. Some legal systems permit adjustments when the equilibrium of the contract has been disturbed or when performance is possible but unexpectedly burdensome, while others essentially prohibit deviations from the contract unless performance is virtually impossible. These doctrines reflect the attitudes that different legal systems have towards the propriety of enforcing the literal terms of a contract, attitudes that are often summarized as embracing one of two Latin maxims. Doctrines that restrict the adjustment of contractual obligations are often associated with the principle of pacta sunt servanda, or “promises ought to be kept,” while doctrines that permit more liberal adjustment are associated with the principle of rebus sic stantibus, roughly translated to condition performance on circumstances remaining the same over the contractual term. American lawyers will think in terms of Uniform Commercial Code (“UCC”) § 2–615, which excuses the seller from a contract when performance has been rendered “impracticable” by the occurrence of a contingency that the parties assumed would not materialize and the risk of which was not assumed by the seller.

THE CISG AS A SET OF COMMERCIAL DEFAULT RULES

The United Nations Convention on Contracts for the International Sale of Goods (“the CISG”) is one of the most successful international commercial law treaties ever devised. It has been ratified by most of the world's important trading countries and become a template for the manner in which commercial law treaties are drafted. As of this writing, the CISG has been adopted by eighty-three countries. These nations are referred to as “Contracting States.” Every major trading nation except India, South Africa, and the United Kingdom has ratified the CISG. Cases interpreting it currently number in the low thousands, and more than 135 United States cases have referred to the CISG. With unreported arbitration awards added, this number must be considerably higher. The effect of the CISG within a Contracting State may vary with domestic law. For example, within the United States, which ratified the CISG in 1986 and where it entered into force in 1988, the CISG is considered a self-executing treaty. The CISG therefore creates a private right of action in federal court under federal law. The CISG provides the default set of rules that govern contracts for the sale of goods between parties located in different Contracting States, and, in some cases, where only one of the parties is located in a Contracting State. Where applicable the CISG preempts contrary provisions of domestic sales law, such as Article 2 of the Uniform Commercial Code (“UCC”) and other state contract law in the United States, and conflicting provisions of the German Civil Code (“BGB”) or the French Civil Code.

The CISG is relatively well known and researched in Europe. The academic literature on uniform sales law is dominated by European scholars, and some of the methodological developments in legal analysis that have prevailed in the United States have been applied only sparingly to CISG scholarship. As a result, at least in the United States, the CISG remains an understudied, largely misunderstood, and somewhat esoteric body of law, unfamiliar to many American commercial lawyers. Many of its provisions are reminiscent of the Uniform Commercial Code, and many American attorneys and courts improperly infer that those similarities mean that the UCC and the CISG have identical scope and meaning.

STATUTE OF FRAUDS AND ARTICLE 12

The CISG affirmatively rejects any statute of frauds or other formality for the creation of a contract. Article 11 recites that “[a] contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses.” In this sense, the CISG recognizes commercial practices in which parties enter binding agreements through handshakes, conduct, or simply oral understandings. Article 11 eliminates any domestic requirements not only that the contract be in writing, but also that it be evidenced by seals, notarization, or other formalities. The assertion that a contract may be proven by any means implies the absence of any parol evidence rule, a subject that we discuss in the next chapter. Of course, in accordance with the “party autonomy” principle of Article 6, parties may deviate from these rules. An offer may, for instance, require that any acceptance be in writing, and a completed contract may be governed by a “no oral modification” clause. The effectiveness of such restrictions raises issues of validity, and thus, to the extent that they are not addressed by the CISG, Article 4(a) dictates that they be governed by domestic law.

The absence of formal requirements for contract formation is a common phenomenon of civil law. But it is less frequent in common law and Scandinavian jurisdictions, and in the countries formerly within the Soviet Union. As a consequence, Article 11 was quite controversial during the drafting of the CISG. The ultimate compromise was to permit (in Article 96) Contracting States that had domestic requirements for contracts of sale to be concluded or evidenced in writing to declare that the CISG articles rendering writings unnecessary are inapplicable where any party to the contract has its place of business in one of those States. The declaration nullifies the effect of Article 11 (and of Article 29, dealing with modification or Part II of the CISG). Article 12 makes such a declaration effective by stating that Article 11 is inapplicable where any party has its place of business in a Contracting State that has made an Article 96 declaration. To date, Argentina, Armenia, Belarus, Chile, Paraguay, Russian Federation, and Ukraine have made Article 96 reservations.

The States Parties to this Convention,

Bearing in mind the broad objectives in the resolutions adopted by the sixth special session of the General Assembly of the United Nations on the establishment of a New International Economic Order,

Considering that the development of international trade on the basis of equality and mutual benefit is an important element in promoting friendly relations among States,

Being of the opinion that the adoption of uniform rules which govern contracts for the international sale of goods and take into account the different social, economic and legal systems would contribute to the removal of legal barriers in international trade and promote the development of international trade,

Have agreed as follows:

PART I. SPHERE OF APPLICATION AND GENERAL PROVISIONS

Chapter I. Sphere of Application

Article 1

(1) This Convention applies to contracts of sale of goods between parties whose places of business are in different States:

1. (a) when the States are Contracting States; or

2. (b) when the rules of private international law lead to the application of the law of a Contracting State.

(2) The fact that the parties have their places of business in different States is to be disregarded whenever this fact does not appear either from the contract or from any dealings between, or from information disclosed by, the parties at any time before or at the conclusion of the contract.

(3) Neither the nationality of the parties nor the civil or commercial character of the parties or of the contract is to be taken into consideration in determining the application of this Convention.

Article 2

This Convention does not apply to sales:

1. (a) of goods bought for personal, family or household use, unless the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for any such use;

2. (b) by auction;

3. (c) on execution or otherwise by authority of law;

4. (d) of stocks, shares, investment securities, negotiable instruments or money;

5. (e) of ships, vessels, hovercraft or aircraft;

6. (f) of electricity.

Article 3(1)

Contracts for the supply of goods to be manufactured or produced are to be considered sales unless the party who orders the goods undertakes to supply a substantial part of the materials necessary for such manufacture or production.

Sales contracts do not specify the obligations of the parties for every possible contingency that might arise during the contract's performance. Writing a completely specified contract for even a relatively simple commercial transaction is impossible and, even if feasible, not cost-justified for the parties. Parties prefer to invest only optimally in drafting, because further investment reduces the net value of the contract. Because some contingencies are so remote that dealing with them explicitly is not worthwhile, the contract will necessarily contain gaps. Implied terms that reflect party preferences also reduce transactions costs because their existence avoids the need to supply an express term covering the same matter. Parties may also prefer implied terms to fill gaps that arise when parties believe that an attempt to fill them sends an adverse signal to the counterparty about their own quality as a contracting partner. For example, requesting an explicit damage limitation term may indicate to the counterparty that the requesting party expects to breach. The CISG supplies implied terms, including trade usage, course of dealing, and course of performance, that address some of the contingencies about which the parties leave the contract silent. The circumstances in which the CISG implies a price term and a duty of good faith are less clear and more controversial.

Implied terms apply to the contract only if it contains gaps. If the contract's express terms deal with the matter, they govern and there is no gap to be filled by an implied term. Thus, in order to determine whether implied terms apply to the contract, the contract's express terms first must be determined and interpreted. Some domestic rules, such as the parol evidence rule, control the sort of evidence a court can consider in interpreting the terms of the contract. For their part, Articles 8 and 11 prescribe the evidence a tribunal must take into account to interpret the contract's terms. The CISG is unclear as to whether (or the extent to which) the parol evidence rule applies to the interpretation of contracts governed by the CISG, although most courts have concluded that the CISG excludes the rule. This chapter describes the CISG's treatment of important implied terms and interpretation of the contract.

In this volume, we explain and comment on the United Nations Convention on Contracts for the International Sale of Goods (CISG), a treaty that regulates the sale of goods among businesses located in different nations. While our focus is on the CISG generally, we are writing in part for an audience that is familiar with different national sales laws. The text at points compares and contrasts the CISG with a sample of these laws, including the Uniform Commercial Code. The purpose of the exercise is to avoid the inference, made by many, that national and international regulatory regimes incorporate identical rules and risk allocations in sales transactions. Our objectives are both to provide information and commentary for commercial law practitioners, and to present a methodological lens, informed by academic literature, for the analysis of commercial law generally.

At the same time, we take an informal theoretical approach to the CISG's provisions that we believe helps illuminate its provisions and assists in their application. This lens suggests that the function of commercial law is to provide default rules that reflect bargains parties would otherwise have reached on their own. In this way, commercial law reduces the costs that attorneys and parties must incur to reach agreement. Analysis of the CISG leads us to be critical of provisions that we find inconsistent with the preferences of commercial parties.

We are indebted to students who performed diligent and thorough research in the preparation of this work. These include Elena Hadjimichael, NYU Law School Class of 2017; Rena Kelley, University of Virginia Law School Class of 2012; Elana Lobo, NYU Law School Class of 2014; Vanessa Richardson, NYU Law School Class of 2013; and Matthew Simon, NYU Law School Class of 2014. Andrew Walker, NYU Law School Class of 2015, reviewed the entire manuscript. Kent Olson of the UVA Law Library was invaluable in discovering source materials. We benefited from numerous substantive conversations with Stefan Krӧll and Joseph Lookofsky. Our greatest intellectual debt is owed to Franco Ferrari, who both encouraged the project and meticulously read and commented on the manuscript. In the process he saved us from numerous errors. Those that remain are attributable only to us. Even more valuable is the constant friendship he provides to both of us.

INTRODUCTION

The globalization of trade in goods creates a problem for parties to an international sales contract. Aspects of the contract potentially are subject to the law of more than one jurisdiction, and different applicable laws can give the parties different rights under the contract. Parties typically prefer to know in advance which jurisdiction's law governs. Although they might provide in their contract for the applicable law, doing so sometimes is not cost-effective. For one thing, the benefit of selecting law depends on the law that is applicable in the absence of a contractual choice. Selecting law also can involve costly negotiations. Even if cost-effective, the parties have no assurance that their choice of law will be honored should a dispute over the contract later arise. For all these reasons, contracting parties usually like to know the law applicable to the contract when the contract does not select it.

The conflict of laws rules adopted by most jurisdictions provide contracting parties only limited help. Because these rules are vague, contracting parties cannot predict with confidence the results of their application. This is true both of American and European conflicts rules, as well as the rules in force elsewhere. More important, conflicts rules are rules of the forum (whether judicial or arbitral) and therefore can vary among fora. The majority of United States jurisdictions adopt the rule of Section 188 of the Restatement (Second) of Conflict of Laws. Under that Section, the law applicable to a contract is the law of the jurisdiction that has the “most significant relationship” to the transaction and the parties. The contacts that the paragraph identifies as relevant to determine that relationship include the place of contracting, negotiation and performance, as well as the place of residence of the parties. These non-exhaustive contacts, which can identify different jurisdictions, make it difficult to predict in advance the law applicable to the issue. The conflicts rule of the Uniform Commercial Code (“UCC”) is similarly vague. Section 1–301(b) makes the UCC as adopted by the forum state applicable to a transaction when it bears an “appropriate relation” to the forum state.

European conflicts rules are not much better. Under Article 4(1)(a) of the 2008 EU Regulation on the Law Applicable to Contractual Obligations, the law of the seller's habitual residence governs contracts for the sale of goods.

INTRODUCTION

Articles 35(1), 35(2), 41, and 42 of the CISG allocate to the seller the risk that goods will fail to conform either to the express requirements of the contract or to certain implied terms. Thus, in everything but name, the Articles describe warranties as to the goods. The language of those Articles will be familiar to the lawyer conversant with the warranties that are called “express warranty,” “implied warranty of merchantability,” or “implied warranty of fitness for a particular purpose,” and “warranty of good title.” One backs into the requirements of Articles 35, 41, and 42 by starting with the statement in Article 36 that the seller is liable in accordance with the contract and the CISG for a nonconformity that exists at the time that the risk passes to the buyer. Articles 35, 41, and 42 effectively indicate what constitutes a lack of conformity by stating certain conditions that the seller must satisfy. Article 35 requires that delivered goods are conforming only if they comply with contractual descriptions, quantities, and qualities required by the contract, only if they are contained or packaged in the manner required by the contract, and only if they meet the implied obligations of Article 35(2). The last of these obligations, by virtue of being incorporated into the contract through the CISG, need not be explicitly set forth by the parties. Instead, they will apply “[e]xcept where the parties have agreed otherwise.” Those implied obligations require conforming goods to be fit for the purposes for which the described goods would ordinarily be used, to be fit for any particular purpose of which the seller was aware if the buyer reasonably relied on the seller, to possess the qualities of any sample or model held out by the seller, and to be contained or packaged in the manner usual for such goods. Article 41 requires that the goods delivered be free of any claim or right of a third party to them. Article 42 imposes similar requirements with respect to conflicting claims and rights that arise from industrial property or intellectual property law.

Article 35 presents a variety of interpretive difficulties. Whether or not goods satisfy the qualitative requirements of the CISG depends on issues such as the meaning of a contractual “description,” the purposes for which the goods ordinarily are used, and any particular purpose of which the seller was aware.

THE DELIVERY OBLIGATION

Performance obligations under the CISG are set forth in deceptively simple terms. Article 30 requires the seller to deliver the goods, hand over any documents relating to them, and transfer the property in the goods, as required by the contract and the CISG itself. Those obligations are then elucidated in Articles 31 through 52. Article 53 recites that the buyer must “pay the price for the goods and take delivery of them,” again in accordance with the contract and the CISG. Most disputes that arise under the CISG concern the performance and thus the interpretation of what is required by these obligations.

What constitutes delivery?

Delivery in international sales will frequently involve a more complicated procedure than in domestic sales because distances may be greater, multi-modal transport may be involved, and there may be additional legal requirements related to import and export of goods. Article 31 sets forth a series of default rules that govern the question of when a delivery has occurred. If the parties do not provide otherwise and the contract involves carriage of goods, delivery occurs when the goods are handed over to the first carrier for transmission to the buyer. The term “carrier” implies that transportation by the seller's own vehicles does not constitute a delivery. “Handing over” implies that merely making the goods available to the carrier will not constitute a delivery. Thus, placing the goods on a loading dock at the seller's place of business will not qualify. The handing over of goods sufficient to constitute a delivery will also frequently trigger passage of the risk of loss, since at that point the buyer assumes a superior position to avoid or insure against loss. We discuss risk of loss rules in Chapter 7. For the moment, we note that the seller completes its delivery obligations in shipment contract that involve third-party carriage by handing over the goods to the carrier, even if the seller has agreed to a term by which it pays transportation costs to the buyer's destination, as in an Incoterms rules CIF or CFR term. Once the handing over has occurred, the seller has completed its delivery obligations and subsequent delay in the buyer's obtaining the goods does not establish a failure to perform by the seller.

Efficiency is the dominant theoretical paradigm in contemporary corporate and commercial law scholarship. The jurisprudential foundations of corporate and commercial law, then, are the foundations of efficiency analysis. They present a mix of historical, moral, and methodological questions, as well as issues of institutional design. What are the historical roots of efficiency analysis in contract, sales, and corporate law? Is moral theory irrelevant to efficiency analysis in these areas? If moral theory is relevant, are morality and efficiency compatible? Even if efficiency is otherwise reasonable as a normative goal in corporate and commercial law, does the complexity of efficiency make it practical to administer in adjudication? What is the best way of pursuing efficiency in corporate and commercial law? The essays in this volume address one or more of these jurisprudential questions.

The historical roots of efficiency analysis. In Chapter 1, “Karl Llewellyn and the Origins of Contract Theory,” Alan Schwartz argues that Llewellyn was an important proponent of the modern law and economics approach to regulating contracts. The received view of Llewellyn depicts him as a rule-sceptic who sometimes advocated the regulation of sales contracts by standards other than economic efficiency. Schwartz rejects the received view, based on a critical evaluation of Llewellyn's writings on sales law between 1925 and 1940. Llewellyn's proposals, as efforts at law reform, assumed the existence and efficacy of legal rules regulating sales contracts, and only sought to replace bad rules with better ones.